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Edited Transcript of SXI earnings conference call or presentation 27-Aug-19 12:30pm GMT

Q4 2019 Standex International Corp Earnings Call

SALEM Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Standex International Corp earnings conference call or presentation Tuesday, August 27, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David A. Dunbar

Standex International Corporation - Chairman, President & CEO

* Thomas D. DeByle

Standex International Corporation - VP, CFO & Treasurer

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Conference Call Participants

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* Christopher Paul McGinnis

Sidoti & Company, LLC - Special Situations Equity Analyst

* Christopher Paul Moore

CJS Securities, Inc. - Senior Research Analyst

* George James Godfrey

CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst

* John R. Cummings

Copeland Capital Management, LLC - Partner & Research Analyst

* Gary Farber;Affinity Growth Advisors;Partner

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Presentation

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Operator [1]

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Good day and welcome to the Standex International Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Gary Farber from Affinity Growth Advisors. Please go ahead.

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Gary Farber;Affinity Growth Advisors;Partner, [2]

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Thank you, Nicole, and good morning. Please note that the presentation accompanying management's remarks can be found on the Investor Relations portion of the company's website, www.standex.com.

Please refer to Standex's safe harbor statement on Slide 2. Matters that Standex management will discuss on today's conference call include predictions, estimates, expectations and other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially. You should refer to Standex's most recent SEC filings and public announcements for a detailed list of risk factors.

In addition, I'd like to remind you that today's discussion will include references to the non-GAAP measures of EBITDA, which is earnings before interest, taxes, depreciation and amortization; adjusted EBITDA, which is EBITDA excluding restructuring, purchase accounting, acquisition-related expenses and onetime items; EBITDA margin; and adjusted EBITDA margin.

We will also refer to other non-GAAP measures, including adjusted net income, adjusted income from operations, adjusted net income from continuing operations, adjusted earnings per share, adjusted operating margin, free operating cash flow and pro forma net debt to EBITDA. These non-GAAP financial measures are to serve as a complement to results provided in accordance with accounting principles generally accepted in the United States. Standex believes that such information provides an additional measurement and consistent historical comparison of the company's performance.

On the call today is Standex Chairman, President and Chief Executive Officer, David Dunbar; and Chief Financial Officer, Tom DeByle.

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David A. Dunbar, Standex International Corporation - Chairman, President & CEO [3]

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Thank you, Gary. I will begin with an overview of our fiscal fourth quarter results and provide an update on our continued progress in executing on our strategic priorities. Tom will follow with a discussion of our financial performance in the quarter, and I will provide some additional thoughts on our outlook.

Now if everyone could turn to Slide 3. Before I begin to comment on this quarter's results, I would like to discuss the press release, which many of you may have seen last night, regarding the upcoming departure of Tom DeByle, our Chief Financial Officer. We are disappointed to see Tom leave Standex. Over the past 11 years, he's had a significant impact on our financial management and company, has been a trusted partner of mine, and I will miss working with him. I want to wish him success in his new opportunity. We appreciate his many contributions over the years.

I'll now move into a discussion of our results. The quarter's results were in line with our expectations and commentary on our third quarter conference call in April. Results were sequentially stronger than the third quarter as expected, but below fourth quarter fiscal 2018. Specifically, performance in Engineering Technologies, Hydraulics and Scientific remained strong. We did continue to experience macroeconomic headwinds that impacted our results in Engraving and Electronics. However, our restructuring efforts are proceeding as expected, and we anticipate achieving an annualized $3.8 million cost savings run rate by 2Q -- by the second quarter of 2020. In addition, we delivered strong free cash flow, further reinforcing our financial strength to pursue various value-enhancing investments and acquisition opportunities.

Despite the impact of a lower level of automotive programs and tariffs on the results, we made substantial progress both in the quarter and year, furthering our strategic goals reshaping our portfolio and strengthening our financial flexibility.

From a portfolio perspective, growth laneways increased 61% year-over-year in fiscal 2019 to $58 million. We also have a very healthy funnel of new business opportunities, reflecting the success of our growth initiatives. Our acquisitions have been accretive to our margins. The FY '19 impact of acquisitions we have made since 2014 was $199 million in sales at 22.5% EBITDA, well above our consolidated margins. We are pleased with our track record of selecting strategically and financially attractive acquisitions for Standex and integrating them effectively into our businesses.

Finally, in the quarter, we announced the acquisition of GS Engineering, a strong strategic fit with our Engraving segment that has growing addressable markets. Combined with the sale of the Cooking Solutions business, which we announced at the beginning of the quarter, we are positioning our portfolio towards higher-growth and higher-margin business segments. Besides our current restructuring program, we have identified a number of other efficiency opportunities, which Tom will discuss later in the call.

From a balance sheet perspective, our position is strong. We delivered strong free cash flow in the quarter as our working capital initiatives continued to benefit results. With a net debt to EBITDA of under 1x and a significant level of liquidity, our financial flexibility enables us to both invest in high-return internal projects and to pursue our active acquisition pipeline. We continue to remain disciplined in allocating our capital.

Turning to Slide 4. While total fourth quarter revenue increased by 2.8% year-over-year primarily due to the impact of acquisitions, our margins were impacted by several factors, including lower automotive programs, tariffs and business mix. As a result, our adjusted EPS for the quarter decreased by 21.6% year-over-year. Tom will go through the quarterly financial results in greater detail later in the call.

Now let's review the segments beginning with Engraving on Slide 5. Sales increased 6.3% year-over-year driven in large part by our recent GS Engineering and Tenibac acquisitions, offset by a lower level of new auto model introductions, the impact of foreign currency and tariff-related disruptions. Growth laneways in Engraving continue to be successful and grew 18% year-over-year in the fourth quarter supported by growth from nickel shell, laser and tool finishing.

Profitability at the operating level decreased 32.9% with an operating margin of 13.9%. Our profitability was impacted primarily by the lower level of new automotive model introductions, which compressed margins in our core business as well as those in our recent acquisitions, and tariff-related disruptions which impacted our China operations.

Looking forward, we expect our end markets to strengthen in fiscal 2020 as global new auto model roll-outs ramp in the second quarter as well as benefit further from the recent GS Engineering acquisition as we expand our capacity to serve the growing automotive demand for soft surfaces. We also were seeing increased demand for tool finishing services and are expanding our offerings to take advantage of this demand. Finally, our restructuring actions are on track to deliver annualized savings of $2.7 million by the second quarter.

Please turn to Slide 6, the Electronics segment. There were several factors that continued to weigh on Electronics results. Let me first remind you that from a comparison perspective, we had a particularly strong fourth quarter in 2018 in this segment as the global market for reed switches was capacity constrained, and we focused on our highest-margin opportunities.

The decline in sales of 4.8% year-over-year was primarily due to lower demand in the automotive market, impact of China tariffs and distributor inventory destocking. These trends were partially offset by contribution from the Agile Magnetics acquisition. Operating income margin was 17.4% as the business continued to face lower sales volume, material inflation and the impact of tariffs. Looking forward, we expect volume to decline in the first half of fiscal year 2020 due to the factors that affected the fourth quarter results, followed by modest recovery in the second half of the fiscal year.

We are taking action to counter market headwinds. Head count reductions are on plan to achieve $1.1 million on an annualized basis by the second quarter through G&A reduction. Additional programs are in place to increase productivity, control spending, reduce factory direct costs and material spend. For instance, we have mentioned previously the high cost of rhodium used in our reed switches. We have now successfully substituted an alternative and less costly material in our U.K. plant, helping to offset some of the material inflation. In addition, in India, we shipped our first products to customers in June of this year. The India facility will lower our global cost structure, support new business growth and accelerate our ability to grow faster. In fiscal year '19, we invested $0.5 million in this facility in operating expense. Despite these near-term challenges, we're extremely well positioned for growth.

Let me provide some additional color regarding the exciting developments occurring in Electronics. We have a robust funnel of new business opportunities that is now 50% greater than this time last year. The funnel has grown from $20 million to $50 million in the last 2 years. This growth is the result of a steady focus on building our new business generation capabilities in our North American and European organizations as well as the impact of a deeper sales funnel stemming from our recent acquisitions, especially from our Japanese reed switch business.

Turn to Slide 7, Engineering Technologies. Engineering Technologies had a very strong quarterly result, with revenues increasing 33% and operating income growing more than twice that rate at 72.6% year-over-year. Supporting this growth was solid execution. This was the largest shipment quarter we have ever had. All end markets, Energy, Defense, Aviation and Oil & Gas, grew in excess of 20%. The backlog to be delivered in under 1 year increased 6.6%. As I noted at the beginning of the call, we have made significant investments to support this segment in platforms such as Aviation, and we are now seeing the return from those decisions.

Looking forward, we expect continued growth on a year-over-year basis and improved margins driven by aviation-related programs such as the A320 and the A350 development programs, which continue to ramp. Sequential growth in the first quarter, however, should moderate some from our record-setting shipment quarter in the fourth quarter '19. We also expect favorable trends to continue in Space and Defense and are working closely with several large OEMs on next-generation space vehicles.

Turning to Hydraulics on Slide 18 (sic) [Slide 8]. The 7.5% increase in sales reflected continued strength in North American refuse, construction and infrastructure end markets, with refuse sales increasing 55% year-over-year. This growth was supported by new product application offerings for vacuum trucks, sweepers and hydro-excavators. Fourth quarter operating margin of 22% increased from 17.1% a year ago and 14.8% in the third quarter of 2019. The margin increase reflected both the higher volume and cost control efforts.

Trends remain largely positive in the Hydraulics segment. On the volume side, there are continued project opportunities in the construction and infrastructure markets as well as the potential for market share gains in the refuse market. We are also pursuing several new business opportunities with double, single-acting telescopic and rod cylinders. In addition, internally we have an active calendar of events focused on further driving output and efficiencies.

Now let's move to Slide 9, Food Service Equipment Group. We saw seasonally driven sequential improvement as expected. Revenue still declined 4.3% year-over-year in the quarter. Scientific sales continued to be solid and grew 7%, benefiting from sales into the growing clinical and drug retail markets. However, this was balanced with a 7% decline in Refrigeration due to weakness in the retail and dealer networks. Operating income decreased due primarily to the lower volume.

As we previously reported in June, we experienced a fire in our cabinet distribution facility. There was approximately $7 million of damage to the company's finished goods and $1 million related to ancillary handling and equipment. The company has insurance coverage associated with the damage to the inventory and equipment as well as business interruption insurance.

As far as our outlook, we anticipate the Refrigeration Group sales will be lower in the first half of fiscal year 2020 as finished goods inventory levels are rebuilt in order to meet customer demand. Going forward, we expect continued strength in Scientific as well as positive trends in merchandising sales as we are seeing good demand from convenience stores and school districts. In addition, we continue to pursue productivity improvements where appropriate.

With that, I will turn the call over to Tom to discuss the financial results in more detail. Tom?

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Thomas D. DeByle, Standex International Corporation - VP, CFO & Treasurer [4]

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Thank you, David. Before I jump into the financials, I'd like to say a few words about my personal situation. As you know, I have announced that I'll be leaving Standex after 11 years. As of last Tuesday, my wife and I became empty nesters. We have lived everywhere, from Italy to Belgium, the Netherlands and even the likes of Fargo, North Dakota. We are mobile and at a point in our lives where we have options. Standex gave me the great opportunity to become the Chief Operating Officer. It was a great position, and I appreciate the Board and David who wanted me to fill this role. I have spent the last few months preparing to be an effective COO. However, another opportunity came up for me, and I decided to take it.

My last day at Standex will be Friday, September 20. I believe that Standex is on the right path in its transformation. The financials are sound. The balance sheet is in great shape to take advantage of both organic and inorganic growth opportunities. I will -- really enjoyed my stay at Standex and I will miss working with my great colleagues and miss not being part of the exciting challenges ahead. It was a very difficult decision for me. I'll be working over the next few weeks to ensure a smooth transition with Ademir, the new CFO.

Now let me provide an overview of the fourth quarter results. From a revenue and EPS perspective, the quarter played out largely as expected, with continued strength in Engineering, Hydraulics and Scientific; sequential improvement in Engraving; seasonal recovery in Food Service; and sales for Electronics were similar to the Q3 2019. Our financial position remains very strong as evidenced by our leverage statistics and liquidity and supported by improved and consistent free cash flow generated by working capital initiatives.

Finally, we are on a plan to achieve an annual run rate of $3.8 million in cost savings from our restructuring plans by Q2 2020. We have identified a significant number of additional opportunities to further drive efficiencies in areas such as factory layout, setup time reduction and improved throughput and plan on implementing these initiatives to capture these opportunities in fiscal '20.

Turning to Slide 10, which details our revenue by segment. On a consolidated, total revenue increased by 2.8% year-over-year for the fiscal fourth quarter. Engraving, Engineering Technologies and Hydraulics all grew year-over-year. As we have indicated in our Q3 call, Food Service revenue increased sequentially and Electronics total revenue was similar to Q3, but both decreased year-over-year.

Given some of the headwinds previously discussed in David's commentary, organic growth was essentially flat. Recent acquisitions, Agile and Tenibac, in total added more than 4 percentage points to growth while the impact of foreign exchange had a negative impact of 1.8%.

Slides 11 and 12 provide the reconciliations between reported GAAP, EPS and adjusted EPS on a quarterly and annual basis. I'll focus my comments on Slide 11 regarding the quarterly results.

Sales growth was 2.8% year-over-year. Gross margin was 33.5% on a GAAP basis and 33.6% on a non-GAAP basis compared with 36.6% in the year ago fourth quarter. The decrease was driven by volume weakness as well as material and wage inflation. Operating margin decreased 280 and 290 basis points on a GAAP and non-GAAP basis year-over-year primarily reflecting gross margin declines.

Earnings per share was $1.05 on a GAAP basis and $1.16 on an adjusted basis, an increase of 19.3% and a decrease of 21.6%, respectively, year-over-year. On a GAAP and non-GAAP basis, tax rates were relatively similar year-over-year at 24.6% compared to 24.7% in the fourth quarter of 2018.

Slide 13 provides a bridge between reported GAAP EPS and adjusted EPS on a quarterly basis. Special items in the quarter which creates a bridge from $1.05 to $1.16 in EPS include restructuring charges of $500,000, a fire loss deductible of $500,000, purchase accounting adjustments of $200,000 related to the GS acquisition and acquisition-related expenses of $700,000, which had a total impact on EPS of $0.11.

Slide 14, free cash flow was relatively similar on a quarterly and year-over-year basis, although our free cash flow conversion statistics increased both on a quarterly and annual basis. We generated free cash flow of $31.7 million in Q4 of 2019 compared to free cash flow of $34 million in the fourth quarter of 2018. This represented a free cash flow conversion of 241.5% compared to 193.4% in the fourth quarter of 2018. The increase reflected improved working capital management driven by decreases in accounts receivable due to our focused collection efforts, improved inventory turns and accounts payable supplier management.

In fiscal 2019, the company generated $38.8 million in free cash flow compared to $40.7 million in 2018. This represented a free cash flow conversion of 83.6% in 2019 compared to 77.9% in 2018.

During the fourth quarter, the company repurchased approximately 201,000 (sic) [202,000] shares for $14 million on an average price per share of $69.89 (sic) [$69.95], bringing our total repurchase activities in fiscal 2019 to approximately $31.2 million (sic) [$33.4 million]. There is approximately $53 million remaining under the Board's current repurchase authorization.

Turning to Slide 15. Excluding the impact of inventory reduction due to the Refrigeration fire, networking capital at the end of the fourth quarter was approximately $143 million, a decrease of $2 million. Accounts receivable DSO improved by 1 day. Inventory turns increased by 14.6% and overall working capital turns increased from 5.6x to 5.8x as of 6/30/19.

Slide 16 summarizes our capital spending, depreciation and amortization trends. Total capital expenditures were approximately $16.5 million compared to $5.1 million in Q4 2018. In total, Standex spent $34 million on capital expenditures in fiscal 2019 compared to a prior guidance between $35 million and $36 million. The company expects the spend between $33 million and $34 million in fiscal '20.

Slide 17 shows our capital -- capitalization structure. Standex had net debt of $104.4 million at 6/30/19 compared to $84.2 million for that same period a year ago. In fiscal 2019, Standex repatriated $51.5 million from its foreign subsidiaries.

Our leverage statistics are strong. The company's net debt to EBITDA leverage ratio was 0.9x at the end of fiscal 2019 compared to approximately 0.7x in the year ago quarter. The net debt to capital ratio was 18.4% compared to 15.7% a year ago. In addition, we had approximately $253 million of available liquidity. This places us in a very favorable position to invest in internal growth initiatives, pursue strategically sound and financially attractive acquisitions as well as return capital to shareholders. In July, we declared our 220th consecutive dividend.

With that, I'll turn the call back to David.

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David A. Dunbar, Standex International Corporation - Chairman, President & CEO [5]

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Thank you, Tom. Our formal remarks conclude with Slide 18. From a financial results perspective, as we enter fiscal 2020, we expect a sequential decline in first quarter due to continued challenges in some of our markets, followed by improved year-over-year performance in our fiscal second quarter.

We expect to benefit from scheduled platform rollouts in the automotive OEM market, a very strong funnel of new business opportunities in Electronics and continued growth in Engineering Technologies and Hydraulics. These improvements will be complemented by the completion of the cost restructuring we announced in the third quarter of '19 as well as ongoing efficiency projects that we have identified.

When we step back from the quarterly puts and takes, we are making significant progress on further building out our higher-margin growth businesses and expect to further add to this momentum in fiscal 2020, supported by a very strong financial position and expanded team of highly energized and talented leaders globally.

Finally, we have a very robust funnel of new growth laneways and an active pipeline of inorganic opportunities that will further strengthen our customer value proposition and results.

And with that, we'll open the call to your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Chris McGinnis of Sidoti & Company.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [2]

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Nice quarter. Maybe we could just talk a little bit about -- maybe go through a couple of the segments. But Engraving, when you're thinking about just the operating income decline in the quarter, just -- can you maybe talk about as that strengthens, how much of that margin comes back and maybe the margin profile of that segment overall? It swayed around a bit in the last couple of years, so can you maybe talk about that?

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David A. Dunbar, Standex International Corporation - Chairman, President & CEO [3]

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Yes, it has, Chris. First thing I'd say is you have to remember this is a services business. So it -- very high fixed cost with our service technicians and our facilities and related equipment, and it levers and delevers pretty significantly. So if you were to look at year-on-year, I'd say, 60% or so of that margin decline is really related to deleverage on volume and out of a mix shift as we get more volume in -- relatively in Europe and North America, less in Asia. Asia is by far our highest-margin business.

So that's just kind of dynamics and movement of the business. Now the sales are up. You have to remember we brought in a couple acquisitions in the year. They serve the same end markets. They are services businesses. They follow that same compression. So we have announced the productivity improvements. We're closing some nonprofitable sites, and we still hold the long term -- the 20% EBIT generation of this business.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [4]

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Okay. And then can you maybe just touch a little bit on the GS acquisition? And how do you expect to think about rolling that out across the -- and the global platform they have?

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David A. Dunbar, Standex International Corporation - Chairman, President & CEO [5]

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Yes. We're very excited about this acquisition. We've just completed, I don't know when it was, like last week at the 100th day of the integration. So our integration -- we got all the plumbing fixed, all the HR stuff largely done, and we're rolling this out sequentially, focusing first on increasing penetration of North American customers, and then we'll begin to roll out into Europe and Asia.

Our sales forces around the world are chomping at the bit to sell this. We just have to ramp up the capability as a technical sale. We need technically adept application engineers and design engineers to do the quotations and help with customers. So it was growing double-digits when we acquired it. We expect that to continue and more to come.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [6]

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That's great. And then one more and I'll jump back in queue. Just within Engineering, you did note that Oil & Gas was up, I think, 23%. I think the expectation was Aviation was to be strong, but can you just maybe talk a little bit about is the Oil & Gas just kind of a onetime thing? Or is that an improving market for you overall?

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David A. Dunbar, Standex International Corporation - Chairman, President & CEO [7]

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Well, Oil & Gas is hard for us to forecast. It's just -- I don't know, 3, 4 years or 5 years ago, it was a $35 million component in this business. This was largely Oil & Gas and Space. Oil & Gas dropped to as low as $5 million. And since then, we have been saying, we don't really count on Oil & Gas long term in this business because the components we serve offer platforms for deep-sea platforms. We don't see indications that will come back in a significant way. And the gas turbine business that we supported in North America, production has moved to Europe and there's some design changes going on in those businesses. So we anticipate modest Oil & Gas sales in the future. This last quarter, we had some deep-sea platform orders, some repair and replacement orders that was unexpected. And our -- so our long-term view is there will continue to be some repair and replacement orders, but it's in the mid-single-digit millions of dollars.

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Operator [8]

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Our next question comes from Chris Moore of CJS.

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Christopher Paul Moore, CJS Securities, Inc. - Senior Research Analyst [9]

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Maybe we could start with Electronics. So Dave, you talked a little bit about that new funnel of business opportunities. Maybe can you just talk a little bit more about kind of timing, the cadence of the potential ramp, and also similar to what you just went through on Engraving, kind of the -- a normalized operating margin as volume returns a little bit?

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David A. Dunbar, Standex International Corporation - Chairman, President & CEO [10]

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Yes. Here again, again, a 20% EBIT is a good expectation for this business. The -- so the -- we were very excited about the funnel. And just the work on this -- it really started 3 or 4 years ago when the Electronics business began looking at their channels and assessing the ability to sell higher-value sensors in addition to the sales and distribution and the packaged switches and relays.

As I mentioned in the -- 2 years ago, our funnel of new business opportunities was $20 million. In that time, we have created a new position, field application engineers. We have filled those positions in North America. We had those positions in Europe. We've added some people in Asia. We've trained our channels. And it takes a while, but we're seeing now the momentum in the funnel buildup. That funnel is now worth $50 million, and the components of the funnel are much larger on average. We have -- gosh, I forget what the number is, but we have more than 10 opportunities that will result in annual sales opportunities of over $1 million, whereas the funnel 2 or 3 years ago, that was -- that kind of funnel was worth $300,000, $400,000. As we get into these higher-value sensors, there are bigger opportunities.

So our expectation is this year, I think, we're expecting something under $10 million of sales from that funnel. And that will ramp up until they are at full volume towards the end of 2020 into 2021. So we'd expect maybe twice that volume in 2021 as they ramp up.

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Christopher Paul Moore, CJS Securities, Inc. - Senior Research Analyst [11]

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Got it. That's helpful. Kind of more big picture, I know you don't give specific guidance, but given where we're talking about -- so Q1 kind of down sequentially and then certain pieces starting to pick up a little bit. Is there any color that you can provide in terms of what EPS growth might look like for this year? Just on a kind of relative basis what our expectation should look like?

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David A. Dunbar, Standex International Corporation - Chairman, President & CEO [12]

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Tom, do you want to take that?

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Thomas D. DeByle, Standex International Corporation - VP, CFO & Treasurer [13]

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Well, we target 8% increase in EPS. And I mean we did have some headwinds this year. So I would anticipate a little bit better than that probably, based with our acquisitions that we've done this past year that David talked about, the higher EBIT percentage. So I'd say we're still targeting 8%-plus.

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David A. Dunbar, Standex International Corporation - Chairman, President & CEO [14]

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We always plan around that. And we see softness in Q1 and then pick up in Q2 and gradual strength, Q3, Q4. Those NBOs we'll win, new auto model rollouts and Engineering Technologies' strength continues.

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Christopher Paul Moore, CJS Securities, Inc. - Senior Research Analyst [15]

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Got it. That's helpful. Absolutely. And just in terms of looking at tariffs. Anything that's worth discussing at this point in time? I know historically we talked a little bit about some of the -- on Scientific, Refrigeration and Hydraulics. Anything that could be a surprise or a negative this fiscal year?

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David A. Dunbar, Standex International Corporation - Chairman, President & CEO [16]

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I wouldn't say surprise or negative. The impact of tariffs -- the primary impact is on our customers in China. So electronics plant in China delivers switches, relays and sensors to manufacturers in China that then export. Their volumes are down. There are toolmakers in the south -- southern part of China that are largely export, they've been impacted by tariffs. But that is already baked in, so that's kind of in our run rate.

Our Hydraulics business, we did get an exemption on our cylinders from our plant in China. I guess the funnel service exclusion, we applied for an exclusion that was granted last December and we'll again apply for that as that renews in December. So from a tariff standpoint, I'd say it's kind of -- it's in the run rate.

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Operator [17]

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(Operator Instructions) Our next question comes from George Godfrey of CL King.

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George James Godfrey, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [18]

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Tom, sorry to see you go. You'll be missed. I hope we cross again in your next life or path. All right. I heard what you said about the targeting of 8% EPS growth, and I'm looking at the Q4 of 2018 slide at some of the financial objectives for the next 3 to 5 years. First question is, to achieve that 8%, how important is it to get the organic growth up towards the GDP plus 2% given it was 0.5%, call it, for this year? To get to that 8% EPS, do you need organic growth in that 2% plus level?

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David A. Dunbar, Standex International Corporation - Chairman, President & CEO [19]

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Not this year, no. We got margin improvements coming in Refrigeration and Engraving, in particular. The continued ramp of ETG, which we know is there, those orders are already booked. And the implementation of those productivity and the material savings in Electronics deliver the majority of the improvement.

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George James Godfrey, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [20]

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Got it. Okay. And then my second question, Dave. I heard what you said about the reed switch buildup back in Q4, and then Electronics EBIT margin targeting 20%. If I look at the Q4 in '18, it was 26%, so 20% EBIT margin down to 20%.

And then I like to look at also on a dollar basis, the year-over-year revenue decline in Electronics was about $3 million, but the EBIT hit was $5 million on that $3 million decline. So was there something specific in the pricing or the profitability of those particular reed switches a year ago that you don't expect to continue as we move through this year?

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David A. Dunbar, Standex International Corporation - Chairman, President & CEO [21]

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Well, a year ago, the global market for reed switches was at capacity. And so we were in kind of a privileged position of -- we allocated our production or shipments to the highest-margin opportunities that were out there. And so last year Q4, we maybe didn't insist enough, but we said 26% is -- everything aligned. And even then we said long term, low 20s is a better expectation for the business. So that's a difficult bridge because the market conditions have changed so much.

Now on top of that, since then rhodium has increased from $2,000 -- I don't know what it was a year ago, $2,000 an ounce to -- gosh, to $4,000 last month. That is a -- we consume about 2,500 ounces of rhodium. So you can do the math. $1,000 is $2 million of impact. So that was the big impact we had.

We announced in our Q1 of this year -- or calendar Q1 that our Mexico plant had their wages doubled overnight from December to January, so new government implemented new minimum wage. So that plant has been gradually working to reduce head count, improve productivity and they're getting back to where they need to be. But those are 2 significant headwinds. The business has done a nice job of passing price on where we could, but in that same time, there's been some slack in the market. There's more capacity out there. It's a little more difficult to get price than it was last year.

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Operator [22]

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Our next question comes from John Cummings of Copeland Capital.

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John R. Cummings, Copeland Capital Management, LLC - Partner & Research Analyst [23]

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Just one question on Engraving. I know in the past, you've cited industry data with a number of new model releases each year. I'm just curious if you can give us an update on that data for the next couple of years.

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David A. Dunbar, Standex International Corporation - Chairman, President & CEO [24]

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Yes. John, I could follow up with you. I don't have those numbers in front of me. But our expectations -- the data source we use is IHS. IHS collects the data from all the OEMs and they identify the dates they expect to launch a new model and significant refreshes. And we know from experience is that the date -- that the -- let's say, 4 plants launched in new ranger, we should see the tools from that ranger about 270 days earlier in our shops. So that -- those published schedules still give us confidence in a ramp-up in volume this quarter, a very big quarter in our Q2 and Q3. And I apologize I don't have the specifics in front of me, but we can give you the list of the programs and their date, if you'd like, as a follow-up call.

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John R. Cummings, Copeland Capital Management, LLC - Partner & Research Analyst [25]

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Okay. And just one question on Engineering Technologies and the margin there, obviously very strong quarter. I guess how sustainable is the margin at this level next year and looking forward?

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David A. Dunbar, Standex International Corporation - Chairman, President & CEO [26]

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Yes. We now -- as the new programs have ramped up, they have better margins, we've invested in automation and robotics, have a very efficient production process. We've said consistently, this business will get to 15% plus EBIT, so we're still confident.

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John R. Cummings, Copeland Capital Management, LLC - Partner & Research Analyst [27]

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Okay. And maybe one final question on the dividend. Just curious given the tough year this year, I know you usually evaluate the dividend in October. Just curious what we should expect for the dividend going forward.

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David A. Dunbar, Standex International Corporation - Chairman, President & CEO [28]

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I'd say you can expect consistent approach as we have in the past. We like to grow the dividend. We're generating good cash. We like the prospects of the businesses.

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Thomas D. DeByle, Standex International Corporation - VP, CFO & Treasurer [29]

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Our payout ratio is really low, and we always review it in our October Board meeting, the dividend.

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Operator [30]

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(Operator Instructions)

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David A. Dunbar, Standex International Corporation - Chairman, President & CEO [31]

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All right. Okay. We can wrap up, I guess. Thank you for your questions. I want to thank everyone today for their interest in Standex, letting us share our results, accomplishments and vision. Also I want to thank our employees and shareholders for their continued support. We look forward to speaking with you again in our first quarter call.

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Operator [32]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.